Asian Paints shares may not rise more from current levels, say analysts as competition rises

The topline performance of India's largest paints manufacturing company, Asian Paints Ltd., was underwhelming in the December quarter. The company missed forecasts due to lower-than-expected revenue despite a delayed festival. Revenue, up 5.4% year-on-year; slightly missed analysts' estimate due to a price cut of 1.3%.

Asian Paints reported a domestic volume growth of 12% on-year in the third quarter characterised by double-digit expansion in both rural and urban markets. The company said that growth was supported by an extended festive season, although there was some moderation in demand for the latter part of the quarter.

The company clocked a gross margin of 43.6%, the best in the last 11 quarters. According to analysts, the gross margin in FY25 and FY26 will be the key monitorable, considering the changing competitive landscape and dwindling raw material price benefits.

At 28%, EBITDA reported a beat led by a higher-than-expected gross margin improvement. Asian Paints achieved a 22% EBITDA margin in the first nine months of FY24. However, management reiterated its EBITDA margin guidance of 18-20% in the medium term.

Global brokerages Jefferies and CLSA have issued an 'Underperform' rating on the stock while HSBC issued a 'Buy' rating with a target price of ₹4,020 a share. HSBC sees fear of price-based competition exaggerated apart from a strong growth outlook.

Motilal Oswal: The domestic broking firm remains cautious as it believes the paints segment will not enjoy higher multiples of the past. "It is important to note that the re-rating of the stock was a significant factor driving the appreciation of Asian Paints' stock price over the past five to six years, as the earnings CAGR has been in the 12-14% range," Motilal said.

The brokerage believes valuations are expensive considering the uncertain competitive pressure. It reiterated its 'Neutral' rating with a target price of ₹3,340 per share.

Kotak remains cautious, given the deceleration in underlying demand and potential impact of Grasim's launch on industry profitability, likely resulting in negligible FY2024-26E EPS CAGR. It revised its fair value to ₹3,100 from ₹3,050 per share earlier.

Nuvama remains positive on Asian Paints due to high entry barriers and its best-in-class R&D. "Rolling over to Q3FY26E yields an increased target price of ₹3,790 from ₹3,650 earlier," it said while retaining a 'Buy' rating on the counter.

Out of the 37 analysts that track Asian Paints, nine continue to have a 'Buy' recommendation on the stock, 13 say 'Hold', while 15 of them have a 'Sell' rating.

The stock was trading 4% lower on Thursday post its earnings. Asian Paints shares have gained nearly 7% in the last one year while it has tumbled 7.38% since the beginning of this year.